Muddy Waters short seller report

Wednesday, Aug 07 2019 by

See link to Muddy Waters short seller report.

Burford short

I've held Burford all the way up from 180p, and think they've picked the wrong target. For instance Burford just announced that it has over $400 million of cash and cash equivalents on hand as of 5 August 2019.  Carson Block seems like a sound guy, very knowledge-able. Also Muddy Waters were very good at finding fraudulent Chinese companies listed in London and New York. So will read with interest. As I say, I'm long Burford and think they've picked the wrong target, but DYOR!

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Burford Capital Limited is a Guernsey-based finance and investment management company focused on law. The Company's businesses include litigation finance and risk management, asset recovery and a range of legal finance and advisory activities. It provides investment capital, investment management, financing and risk solutions with a focus on the legal sector. Its segments include provision of investment capital in connection with the underlying asset value of claims; investment management activities; provision of litigation insurance; and exploration of new initiatives related to application of capital to the legal sector until such time as those initiatives mature into full fledged independent segments. Its provision of litigation insurance segment reflects the United Kingdom and Channel Islands litigation insurance activities. more »

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134 Posts on this Thread show/hide all

pka 11th Aug 55 of 134

I had dinner with a friend who is an eminent tax accountant this evening and we discussed Burford. He said a few years ago he was involved in advising on the tax liability of a similar but smaller company to Burford, so he is familiar wth the 'mark to market' approach to valuing ongoing cases. His view is that the accounts should be a true and fair assessment of the value of a company's assets, and the 'mark to market' approach does not provide that. This is because the true value of an ongoing case will only be known when the case is concluded, and that value might be nothing if the case is lost. The fact that a third party has bought a proportion of Burford's share of an ongoing case for a particular price does not provide a valid basis for valuing Burford's remaining share, in his view, because the price paid by that third party is based on its estimate of the probability of the case being won as well as an estimate of the proceeds if the case is won, but those estimates are very subjective and are not a fair basis for valuing Burford's remaining share of the case. Using statistics from previous cases is also not reasonable, in his opinion, because every case is different. So he thinks the only reasonable approach is the very conservative one of valuing an ongoing case on the basis of what Burford has spent on it so far, and only recognising a profit or loss from that case in the accounts when the case is concluded and the court's decision is known. Of course, that approach would make it more difficult for Burford to raise funding to take on additional cases, but that is not, in his opinion, a reason for using 'mark to market' accounting.

He also said the fact that Burford is essentially an American company but is registered in Guernsey and is quoted on Aim would make him suspicious, as does the fact that the CFO is the wife of the CEO.

So my friend agrees on the whole with Muddy Waters' opinion of Burford. However, he agreed with me that Muddy Water's actions over the last few days look like market manipulation.

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shanklin100 11th Aug 56 of 134

In reply to post #503126


Whilst it is known fact that Burford Capital (LON:BUR) sold 10% of Peterson for $100m, it is not a known fact that their remaining holding in Peterson has been valued on this basis in BUR's accounts. Indeed, had it been, it seems likely that H1 unrealised gains would have been a great deal higher.

Worth reading the following in this regard, the first of which states specifically that BUR do not routinely extrapolate sales to generate valuations on open cases.

Please feel free to adjust your earlier post.

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timarr 11th Aug 57 of 134

In reply to post #503136

Well, this is the critical part:

Following the close of each financial reporting period, Burford’s board determines the fair values of investments after taking into account the views of management, the operation of the audit process and input from external experts (as it considers appropriate).

Which makes it sound like it's a bit of a subjective process, but presumably there's a mark to model valuation going on. And that's the nub of the MW dossier - Burford's management are the sole arbiters of the fair value of their assets and the claim is they're stretching them to their elastic limit.

Looking at litigation finance generally it's clear that there's no agreed way of valuing unrealised assets: there's simply not enough historical data to generate any kind of model, and even if there were the onset of competition in the market means historical rates of return are likely to fall. The question therefore becomes - what is Burford using for its mark to model unrealised value estimates?  But loosely, unrealised assets can be valued at anything from zero to a hell of a lot (AHOAL).

IMF Bentham value unrealised assets at zero - which is obviously silly, as they must have some value. However, this approach has two benefits - firstly, they can't be accused of misleading the market and secondly they're unlikely to come under a shorting attack. Thinking through why they do this the only thing I can come up with is that their management accept that any valuation they put on unrealised assets is likely to be wrong, and therefore prefer to avoid the problem entirely. 

Burford value unrealised assets at something between a conservative amount and AHOAL. The MW thesis is that it's the latter. I think their actual evidence for that is weak, but the question is valid - a billion dollar business needs to be far more transparent about how it derives the numbers its market valuation depends on. 

Given that the fair value estimate is critically dependent on Burford's board it then becomes entirely legitimate to examine the integrity of that board.  And as they've cycled through five CFOs in 6 years to end up with the CEO's wife and currently have no independent directors that's a concern.

Don't get me wrong - there's plenty in the MW report that appears to be wrong, but they've been careful only to use Burford's own data and they've explained how they've arrived at the conclusions they have. Even if they've made mistakes because they're transparent it's going to be hard to find anything actionable here. But the fact that Burford has to clarify any of this points up the problem. They need to publish their valuation processes or at the very least hive them off to a genuinely independent body. 

I have no idea how this will play out, with the MW rebuttal and the Gotham dossier awaited, presumably before the open tomorrow, but I think it's clear there's still a lot of money to be made on Burford. But whether it's on the upside or the down I haven't got a clue.


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shanklin100 11th Aug 58 of 134


AIUI, BUR are obliged by IFRS and GAAP to value open cases and do so when something specific, like a court decision, impacts them. As you state, we do not know the valuation process and it would certainly be of interest.

I guess BUR may view both it and their initial filtering process to be proprietary and not be keen to divulge the former.

It seems IMF Bentham operates under a different regulatory regime where this is not mandatory.

I am sure E&Y would be all over BUR if they found they had underwritten valuations which proved to be other than fair and reasonable... ...and prudent.

We may never know.

Cheers, Martin

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Maddox 11th Aug 59 of 134

In reply to post #503061

There is no requirement to have suffered any loss at all in order to make a report of market abuse.  So no the report would not be fraudulent - and perhaps you could check your facts xcity before you offer helpful advice.

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pka 11th Aug 60 of 134

In reply to post #503136


I was merely reporting my friend's views - I was not saying they were mine. But as my friend is a tax partner at a major London accountancy firm, so I feel that he has a much better understanding of these issues than I do.

His basic point is that any attempt by Burford to put a fair value on its ongoing cases by any means is likely to be proved wrong when the cases are concluded. So he thinks it would be far better if Burford valued ongoing cases on the basis of costs incurred so far, which he said is allowed by accountancy rules, with adjustments up or down when a case is concluded.

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Luthrin 11th Aug 61 of 134

From Burford's first published annual report (2010) after flotation:

Although this current iteration of the approach to accounting for commercial dispute claims under IFRS is somewhat more appropriate than the earlier accounting approach described in the Admission Document, we still believe strongly that litigation and arbitration returns are inherently speculative and are most appropriately accounted for by holding investments at cost until a cash realisation has occurred, as opposed to taking unrealised gains into income before a litigation resolution has occurred. Moreover, the appropriate metric, in our view, for Burford Capital’s share price measurement is its relationship to net asset value based solely on actual cash realisations. Thus, for the guidance of investors, we publish a cash NAV figure alongside the requisite IFRS-based NAV, and we encourage investors to consider the cash NAV as the appropriate valuation metric.

Burford published a 'cash' net asset value per share in the 2010 and 2011 accounts but stopped doing so from 2012 onwards.

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timarr 11th Aug 62 of 134

In reply to post #503156

Hi Martin

Both companies report under IFRS which doesn't require separate disclosure of unrealised gains. Australian accounting rules don't override this - IMF could report unrealised gains if they chose to.

Where there could have been a difference is in how those unrealised gains are calculated - i.e UK and Australian standards could impact the fair value estimate. But as IMF don't make this calculation that's not relevant here.

As EY themselves usefully explain (FVPL = Fair Value Profit and Loss):

A separate disclosure of realised and unrealised gains or losses from financial instruments classified as at FVPL is not required by IFRS. However, a fund may find it useful to provide such information. Often the realised profit is the basis for the amount that must be distributed to avoid incurring a taxation liability or the amount that may be distributed in terms of the contract with shareholders. The calculation of the realised and unrealised gains or losses is often driven by jurisdictional requirements and, as such, differences are expected (e.g., some funds only include the unrealised gains or losses that have arisen during the reporting period). A fund which chooses to provide such information should disclose the basis for the calculation and explain how the split between realised and unrealised is determined.$FILE/EY-good-investment-fund-limited-equity-2018.pdf

That last sentence appears to suggest that companies are expected to disclose their valuation method. One might reasonably enquire of them why that's not happening with Burford.

However, I'm surprised that people here are relying on the the auditors for a measure of confidence about the valuations Burford are producing. Surely after the recent spate of problems we've seen - particularly on AIM - it's clear that auditors offer feeble protection for shareholders?


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Maddox 11th Aug 63 of 134

With respect to their fair value accounting - their auditors in the 2018 Annual Report state p58:

'The valuation of investments is determined to be within an acceptable range of fair values. Appropriate inputs to the valuations were used for investments tested and management judgements and estimates are considered to be reasonable and supported by relevant evidence. The investment valuations calculated by management are consistent with the Burford accounting policy and detailed valuation guidelines and are within an acceptable range. Based on our procedures performed we had no matters to report to management.'

This opinion was arrived at after specific review of cases and valuation methods:

'For all investments where there had been a change in fair value, we tested the assumptions, performed external research on the status of litigation, obtained supporting documentation, considered any relevant secondary market trading and challenged management’s judgments. Where there had not been a change to assessed fair value during the year, we tested a sample of investments applying a combination of methods, including obtaining other supporting information as appropriate and reviewing the contract documentation, if acquired in the current period. Additionally, we performed independent research in the public domain to ensure that all factors we have considered in the valuation are accurate and complete. We held discussions with management to determine the qualitative factors and ongoing legal proceedings and whether there have been any changes in the facts and circumstances that suggest that the fair valuation is not appropriate. In all cases above, we considered whether the investments tested were assessed for fair value consistent with the detailed fair value policy guidelines maintained by management.'

Not only that but:

'At our request, management engaged an independent counsel to perform an annual review of a specific investment selected by us. The review focussed on the significance of the legal judgments and of the subsequent developments arising thereon. We reviewed his conclusions, independence and objectivity and discussed with him the approach and judgements considered in reaching his conclusion.' ....and there's more.

Any further doubts?

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Bonitabeach 11th Aug 64 of 134

In reply to post #503151


"Following the close of each financial reporting period, Burford’s board determines the fair values of investments after taking into account the views of management, the operation of the audit process and input from external experts (as it considers appropriate)."

"Given that the fair value estimate is critically dependent on Burford's board it then becomes entirely legitimate to examine the integrity of that board.  And as they've cycled through five CFOs in 6 years to end up with the CEO's wife and currently have no independent directors that's a concern."

These two paragraphs needed to be immediately adjacent because they go to the absolute heart of the debate. What is the real worth of that £1,851M of "Long Term Investments"?

A section from the Burford rebuttal caught my eye:

"Burford is solvent, generates strong cash flow and has good access to expansion capital. Burford is a rapidly growing business that invests in medium-duration assets. By definition, if its growth rate in a year exceeds the recoveries from prior years' investments, it will need incremental capital. That has been consistently communicated to the market, is common to all growth companies and should not be a concern."

This is the classic hallmark of a PONZI sceme and writers need to add "and should not be a concern" negates his effort to instill confidence.

I will leave the last words to a man wiser than I:

"There is Nothing makes a Man Suspect much, more than to Know little."  Bacon


No position.

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timarr 11th Aug 65 of 134

In reply to post #503201

Any further doubts?

Hi Maddox

As I said:

However, I'm surprised that people here are relying on the the auditors for a measure of confidence about the valuations Burford are producing. Surely after the recent spate of problems we've seen - particularly on AIM - it's clear that auditors offer feeble protection for shareholders?



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bestace 11th Aug 66 of 134

On Thursday’s SVCR I made this comment about the choice of accounting policy by some of the listed litigation funders:

The relevant question in my mind is why does Burford apply IFRS 9 for its investments whereas IMF Bentham apply the Australian equivalent of IFRS 38 (intangible assets) and Litigation Capital Management (LON:LIT) applies IFRS 15 (contracts with customers)?

I’m expanding on this point here with a deep dive into the accounting standards, insofar as they are applied by IMF Bentham.

I appreciate the phrase “deep dive into the accounting standards” will be enough for many people to stop reading right away so I’ll state my conclusion up front:

I think there is a decent argument that IMF Bentham are not applying the correct accounting standard to their litigation investments: rather than treating them as intangible assets (accounted for at cost), they should be treating them as financial instruments (subject to fair value movements).

As their press release in response to the Burford/Muddy Waters situation made clear, IMF Bentham account for their investments as intangible assets and rely on that classification to avoid fair valuing their investments.

As an Australian company, that means applying the accounting standard AASB 138 Intangible assets, which closely mirrors the international equivalent from which it is derived, IAS 38.

AASB 138 (paragraph 8) defines an asset as follows:


IMF explains in note 9 of their last annual accounts how their litigation investments meet that definition:


I think that last sentence is a bit misleading. What they have actually done there is explain how their investments meet the definition of an asset, not how they meet the definition of an intangible asset. 

You might think that if they meet the definition of an asset then clearly they must be intangible assets since they have no physical substance, however AASB 138 has a more precise definition of what an intangible asset is:


The accounting standard clearly has in mind things such as trademarks, licenses, intellectual property etc. so the asset has to be a “non-monetary asset” to qualify as an intangible asset.  AASB 138 does not define “non-monetary assets” but it does the next best thing by defining “monetary assets”:


Given that litigation investments are made in cash and generally settled in cash, are they really non-monetary in nature?

IMF Bentham get around this as follows:


So essentially because their investees may settle winning cases in forms other than cash, IMF Bentham can treat all their investments as non-monetary assets. Happy days! That means they can account for their investments as “intangible assets” which means no fair value accounting is required.

In reality I wonder just how many of their cases do settle as non-cash. I have't checked that point but if it's a tiny minority then it feels to me like IMF are being a bit creative here.

However I have a bigger problem with their choice of accounting standard: even if litigation investments meet the definition of an intangible asset, they also meet the definition of something else:


That definition is taken from IAS 32 Financial Instruments: Presentation (the Australian equivalent AASB 132 is identical in this regard).

Further definitions from the same source:



Remember IMF Bentham describe their litigation contracts as providing them with “a right to a share of litigation proceeds”.

It seems to me that litigation investments fall squarely into this category: the litigation funder holds the financial asset while the investee has the corresponding financial liability, and therefore litigation investments are by definition financial instruments.

So if a litigation investment meets the definition of being both an intangible asset and a financial instrument, how should it be accounted for?

Going back to AASB 138 Intangible assets (again, this is equivalent in all material aspects to the international standard IAS 38):



That seems pretty clear to me: if an investment is both an intangible asset and a financial instrument, then it should be accounted for as a financial instrument.

Hence my earlier conclusion: I think there is a decent argument that IMF Bentham are not applying the correct accounting standard to their investments. Rather than treating them as intangible assets (subject to AASB 138), they should be treating them as financial instruments (subject to AASB 9), and subject to fair value movements.

One further wrinkle: AASB 9 came into force for accounting periods starting on or after 1 January 2018, which means IMF Bentham will be applying it for the first time in their forthcoming annual report (they have a June year end). So maybe it was OK for them to apply the intangible assets accounting last year but this year they will be changing to fair valued financial instruments?

That seems very unlikely. In their 2018 annual report they said this about AASB 9:


Neither that extract nor the press release quoted upthread by timarr gives any indication that they are considering a change of accounting policy. Perhaps they and their auditors have found a way of sticking with intangible assets over financial instruments, but I’d be very interested to hear how they justify that position.

I hope the justification isn't simply that they want their accounting to be more conservative, because as far as I can see the accounting standards don't allow for that line of reasoning.

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pka 11th Aug 67 of 134

In reply to post #503186

Luthrin wrote:

"Burford published a 'cash' net asset value per share in the 2010 and 2011 accounts but stopped doing so from 2012 onwards."

It seems to me to be a pity that Burford stopped doing that.

Does anyone know whether Burford pays corporation tax on the basis of its IFRS-based NAV or on its actual cash realisations? My guess is the latter.

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shipoffrogs 11th Aug 68 of 134

Does anyone know what happened with the big Gerchen Keller acquisition?

The RNS at the time of acquisition made much of the three principals joining the senior management team.

Yet they seemed to have left about a year later.

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xcity 11th Aug 69 of 134

In reply to post #503171

I am well aware of the facts.

If pka had said "I have lost significant value as a result of Muddy Waters' profiteering from market manipulation" as you suggested he do by copy and pasting your email, then that would have been fraudulent. But he didn't, so it wasn't.

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xcity 11th Aug 70 of 134

I don't know how much experience posters have of litigation cases.
Any estimate of value requires an estimate of likelihood of winning and the likely proceeds if there is a win.
My experience is that clients and lawyers tend to be conservative on both if they are funding the case, but rather more optimistic if external funders carry the risk of losing.
Either way, I could only be brought to 'buying' a proportion of their cases at a substantial discount to their own estimates. Their estimates turn out to be too inaccurate for me to pay more.

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dmjram 11th Aug 71 of 134

In reply to post #503271

Added to which, as well as assessing the likelihood of success with the case, there is the matter of actually extracting what the court decides from the other party post judgement, adding further downside uncertainty to the realisable value.

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xcity 11th Aug 72 of 134

In reply to post #503276

It's not been a factor in my own experience, so I forgot it often is.

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timarr 11th Aug 73 of 134

Gotham note out ... not a shorting attack, more of a musing on the moral value of shorting and the underlying issues that Burford faces:

It's hardly damning - it's more a high level analysis of Burford's value - or lack of it - although perhaps the most pertinent point was this:

We think Burford is inappropriately financed. Litigation assets – whose associated cash flows’size and timing are notoriously unpredictable – should not be financed with debt. This poses areal risk of an eventual asset/liability mismatch nightmare.

Interestingly Gotham compare Burford's (alleged) over-valuation to that of Aurelius Equity Opportunities, which Gotham attacked a couple of years ago, Aurelius currently trades about half of its value at the time of the attack.

Basically the nub of the article is: Burford was probably overvalued prior to the MW dossier, MW have raised genuine issues which Burford need to engage with properly but if they do and they are all that they say they are, and they can continue to grow the business, then the share price will recover. 


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Gromley 11th Aug 74 of 134

In reply to post #503286

Yes it is an interesting and relatively balance article by Daniel Yu (Gotham City), but there are some points I would debate.

I don’t think I get (or perhaps I mean agree with) the argument that the uncertainty around litigation makes it inappropriate to be funded through debt. If capital is deployed on an uncertain venture, then so long as the risk is appropriately ‘priced’, why does the source of that capital matter?

Yu makes a decent argument for the merits and benefits of activist short selling, however I think he lets the generalism overspill. A bit like arguing that because the Guardian Angels are (said to be) a force for the good, that justifies all vigilantes in all circumstances.

Yu also makes the point that “Companies do not fail because of short sellers; I have not heard of a single example where that has been the case.” Probably true, although they definitely can restrict a company’s access to capital, as has been suggested with Burford.

This parallels a claim made by Block “Over the medium-to-long-term, if the activist is wrong, the company is not going to stay in the dirt,” That is fine up to a point, but I would be concerned if that were used to justify wilfully inaccurate or deliberately under-researched assertions, because it is a “victimless crime”. [For the avoidance of doubt I should say that this is metaphorical and I am not suggesting any criminality or impropriety].

I do though agree with YU when he says “BUR should view the recent public scrutiny as an opportunity to improve its disclosures and governance.”

Given that the response to many of Block’s questions and assertions was essentially “we told you this already and to reiterate ….” , then perhaps if those disclosures had been clearer and embedded into ongoing reporting then Block would have had to / been able to, make those assertions/questions.

On the other hand, one could argue that if Block had been more meticulous and diligent in doing extra research he could have found the answers himself. Given the amount of money Block made between rumouring and then publishing his document and the full company response (in fact even a point in time before the company response) then it is hard to argue that this would have been time well spent for him.

So whilst I do think that Yu (for Gotham City) makes a good case to present himself as the acceptable face of activist short selling, there is a bit of misdirection here; trying to move the argument on to Burford is(was) overvalued from terms such as “egregiously misrepresenting” as used in the short dossier.

Incidentally, I note that shorters seem to regularly use the word “egregious” so even though I was aware of it’s general meaning, I thought I would look it up. Interestingly defines it as:

In a legal context, the term egregious refers to actions or behaviors that are staggeringly bad, or obviously wrong, beyond any reasonable degree. The term is commonly used to describe conduct of a person, whether a party to a legal action, an attorney or other legal professional, or the court. Egregious behavior may take into account the legality, as well as the morality of a person’s conduct, and is brought to the court’s attention to either bring an end to the person’s actions, or to justify a party’s request for increased damages. To explore this concept, consider the following egregious definition.

It seems to me a strong word to use in a public written document unless you are sure you can back it up

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